Sept. 2018 Issue:

The Small Business Administration is, in my opinion, a model federal agency. It operates at a “zero subsidy” level, which simply means that the programs are self-sufficient and potential loan losses are covered through guaranty fees and ongoing service fees—at no expense to taxpayers.

Fiscal 2019 Fees – What to Expect
SBA 7(a) upfront guaranty fees for the 2019 fiscal year remain unchanged from current levels, with one exception. Guaranty fees will apply to all 7(a) loans, regardless of size. For 7(a) loans of $150,000 or less with a maturity that exceeds 12 months, a 2.00% upfront guaranty fee will become effective 10-01-18. For 7(a) loans of $150,000 or less made to borrowers located in an SBA-determined rural area or historically underutilized business zone (HUBZone), the upfront guaranty fee will be 0.6667% (66.67 basis points) and the annual service fee will be waived. In FY2019, the ongoing (annual service) fee for all loan amounts will be 0.55% (55 basis points) of the guaranteed portion of the loan’s outstanding balance.

USDA Opportunities
Holtmeyer & Monson primarily assists clients that are involved in SBA lending. But did you know that we also assist with loan guaranty programs offered by US Department of Agriculture (USDA) Rural Development? Our main concentration is in Business & Industry Loan Guarantees. To be eligible for this program, the proposed financing project must be located in a rural area (other than a city or town with a population of more than 50,000) but the lender can be anywhere.

We’re glad to answer any questions you have about any of the many financing opportunities offered through SBA and USDA. Their programs can be incredibly successful for any size bank, in any location – and we’re here to help make it happen. As a Preferred Service Provider of the Independent Community Bankers of America, we serve as an out-of house resource for many lenders, and we’d love to help your team in any capacity you need.

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Featured Article

The More Things Change…MBS prepayments very stable in spite of Fed actionby Jim Reber, President and CEO, ICBA Securities

Community bankers, being conservative types (regarding their investment strategies, among other topics), like predictability. Equity markets, commodities, and the dreaded “D” word (“derivatives”) all are perceived by many to be far too volatile for their risk profile, whether we’re talking about personal or commercial investing. I would hasten to mention that risk aversion has served the community banking industry very well over time.

This brings us to this column’s topic. It’s been well documented that mortgage-backed securities (MBSs) are very popular with investment managers. Currently, over half of all community bank investments are of the amortizing variety. Virtually all of these are issued or guaranteed by the government or its agencies, so the credit quality is very high. With interest rates rising, a lot of the high premium prices of the last decade have dwindled, so that risk has pretty much abated. The corollary risk to rising rates (other than prices falling, of course) is that cash flow dries up.

Different this time?So far in this cycle, however, prepayment speeds haven’t shut down. It’s true that they’ve slowed, but most moderately seasoned MBSs are still paying down at about the same pace as a year ago. And let us be reminded that that Fed has hiked overnight rates 75 basis points (0.75%) during this time. What’s going on?

There are really several forces at play here. As the economy’s health has improved, so has the ability of homeowners to afford larger mortgages. There have been plenty of instances this year in which a borrower has sold a home and purchased another, which results in the first mortgage being prepaid in full. That creates cash flow for the investor of the pool in which that loan resided.

Another factor is the (no surprise here) flattening of the yield curve. Although short-term interest rates have risen, and are at their highest levels in a decade, the longer durations have not kept pace, so that posted mortgage rates for both 15- and 30-year loans are still at affordable levels. As of this writing, 15- and 30-year posted rates are about 4.00% and 4.50%, respectively. The combination of these two factors has kept housing turnover, and thus prepayment speeds, very stable.

For exampleThe two largest cohorts of the 15-year agency MBS market are the 2.5% and 3.0% coupon pools. They represent about 75% of all outstanding 15-year securities, which are staples of a community bank bond portfolio. These pools are collateralized with loans whose borrowers’ rates are not “in-the-money” to be refinanced, so there is almost no prepay activity going on at the moment related to refis.

In spite of this, prepayment experience has been surprisingly (and pleasantly) fast. The “speeds” for 2.5% pools have run about 9% consistently for the last 12 months. The 3.0% cohort, which should be a bit faster, has averaged about 10% in the same period. While it’s correct to conclude these speeds aren’t fast in absolute terms, they at least haven’t dwindled to a snail’s pace. And any amount of seasoning improves the paydowns even more, since the scheduled principal reduction on a 15-year pool begins to pile up pretty quickly.

Portfolio manager’s best friendThe benchmark “default” rate for mortgages to prepay is about 6% annually. This is the number of loans that turn over each year for reasons unrelated to interest rates. So another way to look at the recent performance of these 15-year pools is that prepayments are 50 to 70% higher than the benchmark. In an environment in which community banks are clamoring for cash flow from their bond portfolios, these securities meet that need.

Two other points to keep in mind. First, the average lives of these instruments are going to be in the 5-year range at the outset, which is in the sweet spot for a lot of portfolio managers. The average life will gradually shorten as these pools season. Secondly, both of these cohorts are currently priced below par, so the opportunity exists to average down your book values, since they were trading at premiums over most of the last decade.

Jim Reber is president and CEO of ICBA Securities and can be reached at 800-422-6442 or [email protected].

Vining Sparks, ICBA Securities’ exclusive broker, can develop a specific portfolio strategy using selected investments for any community bank. This modeling will display the current and projected returns and market prices for all investments in the strategy over a range of interest rate horizons. To learn more, contact your Vining Sparks sales rep or visit www.viningsparks.com.

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Regulatory Corner

New Form - Personal Financial Information Statement

On July 24th, the SBA released a new Form 413 Personal Financial Information Statement, effective immediately. At Holtmeyer & Monson, we use this form exclusively and strongly encourage every client to adopt it as well. Why? We’ve noticed some gaps in the way information is reported on some lenders’ Personal Financial Statement forms – and the new Form 413 helps lenders avoid these oversights. Examples include:

The SBA requirement of joint disclosure of personal assets and liabilities.

Instructions and details regarding disclosure of minor children.

Use of the new SBA Form 413 prevents possible errors of omission that could adversely affect the SBA guaranty in the event of a loan default and liquidation/guaranty claim.

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SBA has released a new 7(a) Authorization Form with several substantive changes, i.e., the use of CAIVRS and other certifications. These changes – including the new agency logo – make for a more comprehensive Authorization document. We use the new form on all 7(a) transactions. Contact us with questions.